Retailers have been down on luck throughout the first quarter 2016 as the sector has reported dismal results with a variety of traditional brick-and-mortar operators reporting lower-than-expected results, in spite of already low estimates.
Rosy Times Ahead
However, post the first quarter, U.S. retail sales increased on a year-over-year basis in the months of April and May 2016. The retail sales data released by the U.S. Census Bureau indicate that the U.S. economy has shown improvement in spite of a slowing job market.
Further, lower-than-expected U.S. job growth in May has led the Fed to stall its decision of raising the interest rate for Jul 2016. Moreover, the upcoming Presidential election is likely to postpone the rate hike until Nov 2016. Lower interest rates instill consumer confidence and thus help maintain consumer spending at high levels.
Discount Retail: High and Stable Returns
Amid the widespread volatility, lower-than-expected job growth and slow improvement in consumer spending, discount retail stocks are yielding high and stable returns. Moreover, in this era of value-driven consumers, particularly millennials, discount retailers are a much favored as they offer goods at attractive discounts.
3 Discount Stocks to Bet On
With the help of our new style score system, we have identified three discount retail stocks that have excellent prospects and might prove to be great investments over the long term.
Our Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.
To arrive at the best value picks, we have shortlisted consumer staple stocks that either have a Zacks Rank #1 or #2 and a Value Style Score of ‘A’ or ‘B.’
Burlington Stores, Inc. BURL: This Zacks Rank #2 discount retailer with a beta score of 0.31 and a Value Score of ‘A’ is a solid bet. A stock with a beta score of less than 1 suggests that the price movement of the stock is not highly correlated with the market. Since they are less volatile than the market, they are safer bets at the moment.
This Burlington, NJ-based retailer of branded apparel products has a long-term earnings growth rate of 17.7%, and has witnessed positive estimate revision in the past 30 days. Burlington Stores posted an average positive earnings surprise of 23.2% over the trailing four quarters and is expected to witness earnings growth of 21.5% in fiscal 2016 and 16.5% in fiscal 2017.
Fred’s Inc. FRED: This Zacks Rank #2 seller of general merchandise through its retail discount stores and full service pharmacies carry a Value score of B. The stock has had a good run so far this year, gaining around 8.8%. Over the past 30 days, analysts have become increasingly bullish on the company, with 2 out of 4 estimates moving north for fiscal 2017 earnings.
Fred’s has been undertaking several initiatives to drive profits. The company undertook a new plan in fiscal 2015 to reposition its merchandise assortment and focus on convenience and consumables instead of discretionary categories where the brand has little competitive advantage. Further, it has a strong pharmacy department which has been gaining momentum recently and has been contributing significantly to revenues.
We also suggest investing in Wal-Mart de Mexico SAB De CVWMMVY which carries a Zacks Rank #2 and a Value score of ‘B’. EArnings is expected to grow by 10.2% in the long term and has been reporting modest comps growth for the past few quarters which has led to upward estimate revisions in the past 60 days. Walmart De Mexico recorded an average positive earnings surprise of 5.84% over the trailing four quarters and is expected to witness earnings growth of 10.8% in fiscal 2017.
Bottom Line
We believe these stocks can prove to be valuable additions to investors’ portfolio.
You can use the Zacks Stock Screener to find other stocks with this winning combination. Investors can confidently end their search at stocks with a favorable Zacks Rank which encompasses its strong fundamentals, promises price movement and highlights analysts’ constructive view on the same
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